Family Management and Business Success!
A Primer for Founders Who Have Dynastic Intentions
Successful transition of a family business to the next generation is seldom an easy task. For those family-owned enterprises established in the years immediately following World War II the question of transition and succession and, ultimately, the continuity of family ownership and management is increasingly real and urgent.
Letting go isn't easy for the founder, but it's necessary if the firm is to prosper in the future with a new generation of family ownership and family management.
Statistical research also reveals another aspect of family-owned business – a very real tendency to self-destruct: less than a third survive to the second generation –70 per cent are either liquidated or sold soon after the founder's retirement or death; and less than 13 per cent last through the third generation. Successfully managing the transition from the founder to the next generation is not only critical for the future of the enterprise – and the family – but has a real impact on the economic health of the country. To describe the growth and transition of a family business in the dry terms of the accountant or MBA is both frustrating and inaccurate because both accountancy and business administration programs strive to make business a predictable science where juxtaposition of the right numbers in the right sequence will yield a "right decision", "an appropriate course of action", or "the perfect plan".
For the founder this approach leaves out all consideration of the "fire in the belly" that got him or her started in the first place.
Our consulting work with family-owned businesses, as well as extensive research in Canada and the United States, reveals a three-stage pattern in family businesses that have successfully survived the transition from the founder to the next generation.
Researchers (and consultants) refer to these three stages as:
- Maturation: the steps the founder takes to ensure that the business can be passed on to future generations.
- Professionalization: the transformation of the business from a hands-on entrepreneurial organization into a more formal structure with clear objectives, a comprehensive business plan, a well-defined planning process and the participation of all key members of the management team.
- Succession: the preparations for, and implementation of, the actual handing over of a business to the next generation.
While these stages can be well organized and clearly defined in any report, in reality the founder, the family and the business usually move through these stages in a haphazard, overlapping way that reflects the founder's desire to achieve a balance between his/her family and the business.
Founders, in our experience, are less interested in questions of professionalization and succession than in ensuring continuity for their business.
For the founder, ensuring continuity through a successful transition of his/her business to the children not only involves these three stages of maturation, professionalization and succession but balancing and resolving practical questions of personal estate planning organizational development and family ownership and management.
Maturation is, however, the starting point for successfully ensuring continuity for a family-owned enterprise from one generation to the next.
It is basically a matter of the founder assuming the roles and responsibilities demanded at various phases in the business' evolution to contribute to the firm's continued growth, success and future.
Our experience confirms the eight major phases researchers have identified in the maturation stage. They are:
- Initiating: creating products/services and securing start-up financing.
- Doing: participating in all aspects (i.e. making, selling, administering) of the business.
- Building: securing the necessary financial, physical and human resources to increase the business' capabilities.
- Learning: selecting areas of the business in which to concentrate and become most proficient.
- Managing: directing the business and monitoring the results achieved.
- Teaching: training and consulting to those who must manage the business.
- Mentoring: Preparing the individual(s) to assume responsibility for the growth of the business.
- Letting Go: Transferring power and moving on to other priorities.
There is considerable overlap among these phases, especially in the early years of the business when the founder must of necessity be a jack-of-all-trades, assuming a diversity of roles and functions simultaneously to keep the business thriving and vital.
As the business becomes more established and begins to mature, the founder should begin to function in one or two dominant roles, concentrating his or her efforts in the areas where the greatest impact can be felt.
Unfortunately, this progression is not made easily – particularly becoming less involved in the Doing and Managing phases.
Progression is difficult for founders. The business is as much their child as their sons or daughters; the business may in fact be more 'perfect' because it's created in the image of the founder. It is completely subject to the will and direction of the founder and never thinks for itself or rebels against the authority of Mom or Dad… the perfect offspring.
The business is also the ultimate expression of the founder's ego. It is the ultimate expression of confidence in his/her own genius, judgment, stamina and ambition. Just as a parent basks in the warm glow of their young children's unquestioning and nonjudgmental love, the founder is warmed by the knowledge that s/he is indispensable to his/her corporate offspring. This, of course, is the point at which most founders will judge that the business has succeeded – and also come face-to-face with the realization that s/he is getting older.
It's at this point that the founder's personal transition usually begins with the collapse of two self-delusions: 1) I can continue to be the jack-of-all-trades, doing everything that needs doing just like I have from the day I opened the door, and 2) I am going to live forever so I can keep on doing 1) forever.
The year before retirement isn't the best time to start planning for continuity of family management. Successful transition between generations just doesn't happen overnight.
A founder can't continue doing everything and s/he won't live forever. But unless those self-delusions collapse there won't be a successful management transition in the business.
Parents plan for their children's security in the event of accidental death on the family level, so why does the founder/parent ignore this basic rule of humanity in relation to the business s/he has created?
Based on our work with family-owned businesses, it's probably for the same reasons that statements such as "a child's personality is set in their first seven years of life" are such cold comfort to parents who didn't think much about it in between the sleepless nights, the temper tantrums, the messy bedrooms, the school problems and the warm moments on the couch watching Saturday morning cartoons.
Most parents have fuzzy dreams of what they hope their children will become. But, with the exception of a few measures such as choosing a guardian for them in the event of accidental death, insurance and saving for their education, most parents simply hope their children will be happy and successful – and let it go at that.
For the other child, the business, we've found that most founders don't do even that much – no 'guardian or insurance' to ensure the business' survival – until the business is well into its late adolescence, i.e. being forced by the age or ill health of the founder into the guardianship of its next custodian. To achieve continuity of family ownership and management through a successful transition the founder must let go, relinquishing control and guidance of his/her baby to a new custodian – and do it voluntarily.
Just to make things difficult, the founder is also a parent – with years of parental memories. But if the business is to remain in the family, s/he must somehow give control of this most cherished possession/child to someone whose bottom s/he wiped, who took what seemed like two years to figure out that 2+2=4; who drove the school's driver-ed car into a ditch during his/her first lesson (in forward no less); etc., etc.
Every founder we've worked with has had any number of examples they believe justify the following questions, which in one way or another every founder asks him/herself.
'Why would or should I entrust the care and feeding of this most precious child of my ego, genius and ambition to some one so lacking in intellectual capacity, sense of direction, logical thinking, consideration and respect. Who knows if my children even want the business. And since none of my children have my experience, none of them could replace me anyway.'
Sound familiar? Maturation, continuity planning and transition to the next generation are difficult, to say the least, but not impossible as the 30% of family-owned businesses that survive through the second generation and the 13% who make it through the third can attest.
But it takes planning from all members of the family – as well as the founder – to have even a hope of succeeding. And the earlier the founder begins thinking about it, the better.
After all, it takes constant attention for 18 years to raise a child to legal adult status… why would a business operator wait until a year or two before retirement to begin to plan his/her own succession and the transition to new management.
It would seem obvious that the day to start thinking about continuity of family ownership and management is the day after the day the founder starts the business.
Some founders we've worked with have had a personal development plan – often unarticulated, almost always unwritten and informal – to help them move through the phases of maturation. No matter how informal their personal development plan has been, these founders have recognized the need to continually reassess and clarify their activities as founder and parent if their business is going to evolve, grow, prosper and be ready to be passed on to the next generation – and if their children are going to want to assume management of the business.
(A separate article, Planning for Continuity: From Business Founder to Family Business, outlines common elements in personal development plans for founders and, Transfer, Transition, Tension and the Family Business, describes other aspects to the transition process.)
The maturation of the founder – that is his/her growth and evolution as a business owner whose goal is continuity of the enterprise under family ownership and management – is essential if the business is to grow and prosper.
The most significant result of this personal evolution is that the founder/owner can confidently delegate the daily operational responsibilities to others, and concentrate on critical strategic issues such as planning and guiding the future growth of the business.
For those of you who think this is all common sense and presently run your business from your pocket, we remind you of the immortal words of Will Rogers, who said: "Common sense ain't necessarily common practice."